Informality and the capitalist economy: A perspective from the Global South

5 Understanding connections between the informal sector and capitalist sector

So far, we have discussed the dual economy largely in terms of structural change, which is a long-run process taking place over decades or even centuries. But even at a given point in time, the two sectors of the dual economy are closely connected with each other. There are two main ways in which these sectors interact: via product markets and via the labour market. Let us examine each in turn.

Product market linkages: Subcontracting

To understand linkages between the informal and capitalist sectors in the product market, we need to understand the term ‘value chain’—a series of steps via which a commodity goes from raw materials to finished product. At each stage some capital and labour are put together and bit by bit the final good is produced. Advances in information, communication, and transport technologies have enabled capitalists to manage value chains spread over the entire globe. One example of such a global value chain (GVC) are semiconductors (‘chips’), whose production spans four continents, North America, South America, Europe, and Asia. But many other commodities—such as automobiles, smartphones, and even garments—have GVCs spanning multiple countries.

putting out system

A system of subcontracting linkages between capitalist firms and the informal sector.

Even though a value chain is organized by a leading firm that is capitalist in nature, part of the chain may encompass the informal sector via outsourcing or subcontracting linkages. For example, multinational apparel brands such as Gap or H&M typically purchase garments from suppliers in low- and middle-income countries. These suppliers are themselves capitalist firms. However, down the value chain, some parts of the production process that require relatively little technological input or are particularly labour-intensive in nature are often subcontracted (‘put out’) to enterprises in the informal sector. This is not a new system. In his influential study of nineteenth century capitalism, Karl Marx referred to this as the ‘putting out system’.

To learn more about Karl Marx’s ideas on labour markets, read the Great Economists box in Section 6.7 of The Economy 2.0: Microeconomics.

A common example of subcontracting is self-employed people working in their own homes, contributing to the production of a branded product. The civil society organization, Women in the Informal Economy Globalizing and Organizing (WIEGO) works with such women all over the world, helping them to organize and demand higher prices for their output. WIEGO estimates that over 250 million men and women work as home-based workers worldwide.

In India, an estimated five million homeworkers are engaged in production for garment and textile supply chains. A recent survey of 340 garment factories in Delhi and Bengaluru showed that 58% of surveyed factories outsource to homeworkers.¹ Take the example of the town of Tirupur in the southern Indian state of Tamil Nadu, known as the ‘T-shirt capital’ of India. An estimated 200,000 workers are employed in this industry. A simplified schematic of the Tirupur supply chain is shown in Figure 12. Many international brands such as Adidas, Marks & Spencer, Walmart, and H&M get their T-shirts produced in Tirupur from Indian capitalist firms specializing in exports (Tier 1). These firms subcontract parts of the production process to smaller workshops (Tier 2), who in turn subcontract out to self-employed homeworkers (Tier 3).

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https://books.core-econ.org/insights/informality-and-the-capitalist-economy/05-connections-between-formal-and-capitalist-sectors.html#figure-12

Figure 12 A schematic representation of a Tirupur garment supply chain.

World Development Indicators database.

According to WIEGO estimates, Tirupur is home to over 40,000 home-based workers whose tasks include embroidery, stitching, cutting loose threads, removing stains, and packaging. Contractors from capitalist firms visit their homes two to three times a week to supply raw materials and take away finished goods. The capitalist firm provides the fabric to be worked upon and the homeworker provides thread, needles, and other simple tools needed, along with paying for electricity, water, and premises.

Subcontracting relationships between the capitalist and the informal sector continue to be an active area of research in various disciplines including economics, sociology, and anthropology. For a review of this research literature, read: Chen, Martha Alter. 2007. ‘Rethinking the Informal Economy: Linkages with the Formal Economy and the Formal Regulatory Environment’. DESA Working Paper No. 46; and Meagher, Kate. 2013. ‘Unlocking the Informal Economy: A Literature Review on Linkages Between Formal and Informal Economies in Developing Countries’. WIEGO Working Paper No. 27. WIEGO.

To learn more about garment workers and how the Tirupur knitwear industry was affected by the COVID-19 pandemic, read ‘The World’s Most Vulnerable Garment Workers Aren’t in Factories – and Global Brands Need to Step Up to Protect Them’ and ‘COVID-19 Crisis and the Informal Economy: Home-Based Workers in Tiruppur, India’.

This ‘putting out’ system is an example of self-employment—workers work from their homes using partly their own capital including the place of work (their home), their own source of electricity and water, and basic equipment like needles and thread. A private contractor with whom they have an arrangement specifies their piece rate; they are paid per task completed. In more recent years, gig work has emerged as a modern form of the putting out system, where the platform pays via an app per task completed. You can read more about gig workers in the next ‘Find out more’ box.

Like many other industries, the Tirupur knitwear industry suffered a large shock during the COVID-19 pandemic. According to Social Awareness and Voluntary Education (SAVE), an organization of homeworkers in Tirupur, many of their members did not get paid for products that had already been delivered to factories. Of course, this problem was not unique to the informal sector. However, studying the incomes earned by such homeworkers reveals the special vulnerability faced by them. For example, one of the workers interviewed in the WIEGO study reported being able to finish working on 100 pairs of track pants per day. She was paid INR1.10 (USD0.01) per pair (in 2020), earning INR110 (USD 1.43) per day. Her rent—for a room, a kitchen, and a bathroom that is shared with three other families—was INR1,600 (USD20.89) per month. That is, assuming a working month of 25 days, nearly 60% of her income went to paying home rent. Though data on what proportion of income goes to paying rent is not generally available for all workers, the rule of thumb is that no more than around one-third of monthly income should go towards this purpose.

Exercise 4 Gig work

1. What are the major platforms for gig work and types of gig work that you commonly see in your country?
2. How would you characterize workers in these enterprises/platforms? Are they self-employed or wage workers? Explain your answer.
3. Have there been similar court cases to the Uber v Aslam case or demands by gig workers in your country? If so, briefly outline the situation and the outcome. If not, find a similar example from another country to discuss instead.
4. How are gig workers categorized by law in your country?

Movements between types of employment

The second way in which the capitalist and informal sectors are connected to each other is via the movement of workers rather than the movement of goods. Think back to the categories of employment discussed in Figure 2. This categorization may have led you to think that each individual fits neatly into one of the boxes. However, individuals often move back and forth between employment categories over the course of a year or even a few months. A self-employed cab driver with their own car may get a job with a capitalist firm to drive their company bus, only to be laid off and go back to driving their car as a cab. A weaver working in a household enterprise may get a job in a weaving factory for part of the year during peak festival season. A farmer cultivating their own land may find work as a casual-wage worker at a construction site during the lean season only to return to farming at harvest time.

Unlike regular-wage jobs of the formal variety (those with long term contracts and benefits), casual-wage jobs are easy to find (and easy to lose). They also have lower education requirements. Contracts (mostly oral) tend to be short-term—a day, a few days, or a few weeks. This means that the barriers to entry for new workers are much lower in casual-wage jobs. Similarly, in the self-employment sector, setting up a small retail shop selling imitation jewellery is much easier than either setting up a large capitalist firm or finding a formal regular-wage job in one. For these reasons, there is a lot of movement between the self-employment sector and the casual-wage part of the capitalist sector.

panel dataset

A combination of cross-sectional and time series data where the unit of analysis (households, firms, countries etc) are followed over time. Panel datasets are useful because we can make comparisons between individuals and comparisons of the same individual over time.

These movements are studied by many researchers. For example, the economists Kevin Donovan, Will Jianyu Lu, and Todd Schoellman put together a panel dataset tracking 80 million workers across 49 countries. (Panel datasets are useful because we can make comparisons between individuals and comparisons of the same individual over time.) These economists found that low- and middle-income countries are characterized by much higher rates of job flows. One of the primary reasons for the high flows is movement of individuals within what they call ‘marginal jobs’: self-employment, wage work without job security, and low-earning wage work.³

Another economist, Surbhi Kesar, found that in the case of India, the net movement of workers is almost zero. That is, individuals do move from self-employment to wage employment, but there is almost as much movement the other way. Using panel data from the India Household Development Survey for the years 2004–2005 and 2011–2012, she found that there was a large percentage of households (nearly 80%) who reported non-agricultural wage income as their major source of income only in the second period, and not in the first period. Conversely, an equally large percentage of households (85%) reported non-agriculture self-employment as their main source of income in the second period and not in the first period. Figure 13, reproduced from Kesar’s research paper, shows the percentage of households who moved from or towards a particular source of work as their primary income source. Except for self-employment in agriculture, which tends to be ‘sticky’ as indicated by the low numbers of transitions, all other forms of employment saw a large flux in this period.

What might be the reasons for such transitions? One possibility is that economic growth has failed to create secure forms of wage employment, such as full-time salaried work in large factories or offices. Rather, the nature of wage employment created has been precarious, with jobs being easily gained or lost. Ethnographic studies by Jan Breman and others have documented a large population of ‘footloose labour’ in India, migrating between rural and urban areas as well as between industries (agriculture to construction and back) and types of employment (wage and self-employed).⁴ Even in 2023–2024, the Periodic Labour Force Survey indicated that a large fraction of wage employment in India (nearly 80%) is of a precarious nature, without any job security.

These research studies demonstrate that the flow of labour between the two parts of the dual economy is not just one-way (from the informal to the capitalist sector); it can also be the other way around. What can be done to ensure that the flow in the desirable direction is stronger than the opposite one? In the last section we turn to this important question.